Insight Enterprises, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Insight Enterprises fourth quarter and full year 2020 operating results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Ms. Glynis Bryan, Chief Financial Officer. Thank you. Please go ahead, ma'am.

Thanks, Shelby. Welcome, everyone, and thank you for joining the Insight Enterprises Earnings Conference Call. Today, we will be discussing the company's operating results for the quarter and full year ended, December 31st, 2020. I'm Williams Freund, Chief Financial Officer of Insight, and joining me is Ken Landnick, President and Chief Executive Officer. If you do not have a copy of the earnings release that was posted this morning and filed with the Securities and Exchange Commission on Form 8K, you will find it on our website at insight.com. under our investor relations section. Today's call, including the question and answer period, is being webcast live and can be accessed by the investor relations page of our website at insight.com. An outside copy of the conference call will be available approximately two hours after completion of the call and will remain on our website for a limited time. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today February 11th, 2021. This call is a property of Insight Enterprises. Any retransmission, redistribution, or rebroadcast of this call in any form without the express written consent of Insight Enterprises is strictly prohibited. In today's conference call, we will refer to non-GAAP financial measures as we discuss the fourth quarter and full year 2020 financial results. When referring to non-GAAP measures, we will refer to such measures as adjusted. Non-GAAP measures to be discussed in today's call include adjusted earnings from operations, adjusted earnings before interest taxes, depreciation, and amortization, also referred to as adjusted EBITDA, adjusted diluted earnings per share, and adjusted return on invested capital. You will find a reconciliation of these adjusted measures for actual GAAP results included in the press release and the accompanying slide presentation issued earlier today. Please note that unless highlighted as constant currency, all amounts and growth rates discussed are in US dollar terms. Finally, let me remind you about forward-looking statements that will be made on today's call. All forward-looking statements that are made during this conference call are subject to risks and uncertainties that could cause your actual results to differ materially. These risks are discussed in today's press release and in greater detail in our most recently filed periodic reports and subsequent findings with the SEC. With that, I will now turn the call over to Ken. And if you're following along with the slide presentation, we will begin on slide four.

Ken? Hello, everyone. Thank you for joining us today to discuss our fourth quarter and full year 2020 operating results. This past year is one of the most challenging we've faced as a company and as a society as a whole. From the difficulties of the COVID-19 pandemic to the important social justice issues deserving of our attention. We have navigated our fair share of complex experience together, and in insight, we did it while living our core values of hunger, heart, and harmony. We saw our values and actions around the globe demonstrated by our warehouse and distribution center teammates who tirelessly and bravely reported to work each day so essential workers and others had equipment they needed to fight against COVID-19. We saw our values further demonstrated as teammates across the company donated their time, talent, and finances to make a difference in their communities. through 3D printing of face shields, sewing of masks, food donation deliveries, hand sanitizing, sourcing, and monetary donations to teammates in crisis. I could not have been more pleased with our teammates' incredible display of culture, and I've never been proud to be part of our Insight family. In the fourth quarter, the demand environment continued to be challenged, where we focused on answering our clients' most pressing IT needs, while helping many plan for the investments required to support the business as the economy recovers. During the fourth quarter, we drove double-digit growth in cloud and warranty solutions, which pushed gross margins to 15%. And we'll combine with the positive effect of the acceleration of our PCM integration, including the cost synergies, this helps us achieve adjusted earnings from operations growth of 12% year over year. Specifically for the fourth quarter of 2020, consolidated net sales were 2.3 billion, flat year over year. PCM results were included in our full fourth quarter 2019 results, the acquisition having closed on August 30th, 2019. Gross margin expanded 30 basis points year-over-year to 15%, reflecting a higher mix of cloud and warranty solutions. Adjusted earnings from operations were 92 million, up 12% year-over-year, and in the GAAP basis, earnings from operations were up 24% compared to the same period last year. Adjusted diluted earnings per share was $1.76, up 12% year-over-year, and in the GAAP basis, diluted earnings per share was $1.50. Moving on to slide five. For the full year of 2020, we reported record net sales of $8.3 billion, an increase of 8% over 2019. The benefit of including PCM in our results for the full year of 2020 was partially offset by the negative impact of COVID-19 on overall demand and certain supply chain challenges in the business during 2020. Our team's focus on growing our services and solutions mix Helped improve gross margins by 90 basis points to 15.6%, a new record for the company. Cloud as a percent of gross profit increased to 20% compared to 18% in 2019. We also expanded to service gross profit 130 basis points year over year to 48% of consolidated gross profit. Our business generated $356 million in cash flow from operations for 2020, a record for the company. On to slide six. Topline growth and gross margin expansion combined with continued expense discipline, including acceleration of cost synergies related to the PCM acquisition drove adjusted earnings from operations up 14% in 2020 compared to 2019. On a gap basis, earnings from operations increased 13%. Adjusted liabilities per share for the full year 2020 was $6.19, an increase of 14% over 2019 results, and represents another record for us. On a gap basis, the losing earnings per share for the full year of 2020 was $4.87, an increase of 10% over 2019. Finally, adjusted EBITDA for the full year of 2020 was $367 million, compared to $322 million in 2019. Next on slide seven. As we look back to our business for the full year of 2020, we were proactive in our approach and were pleased with all we accomplished under challenging circumstances. As the pandemic began, The health and safety of our teammates was most important. We prioritized their safety and well-being and ensured that they felt supported during these uncertain times. With COVID-19 forced the closure of most Insights workplaces in March 2020, we quickly enabled remote work for roughly 10,000 teammates. We completed the integration of PCM in 2020, retiring nine ERP systems into our SAP platform and also accelerating some of our cost synergies. We are exiting the year with approximately $70 million in annualized run rate cost savings, one full year ahead of our previously committed schedule. Expertise across our solution areas allowed us to help clients adapt to new challenges presented by COVID-19. Initially, we supplied hardware and other critical IT solutions that able to work from home and other essential functions. Our digital innovation solution area created the connected platform detect to prevent solution to help our clients provide a work, a safe work environment for their employees and customers. We continue to modernize our online experience to creatively reach and grow strong client relationships through digital engagement and marketing. In the second half of the year, we again see hardware bookings recover in North America, the region with the highest mix of hardware net sales. We also invested in our sales force to ensure we have key sales and technical talent in place to compete as the market continues to recover. As a result, we're well-positioned to help our clients drive business outcomes in a highly digital environment. Our focus on culture, teammate benefits, and leadership development continue to be acknowledged with several more key recognitions this year, including number 296 out of more than 750 on Forbes World's Best Employers, number 70 on Fortune's 100 Best Workplaces for Diversity and Inclusion, and number 62 on Forbes 2020 list of America's Best Employers for Veterans. Fast Company recognized Insight and World Change in Ideas Awards for Social Good and Human Rights Campaign Foundation recognized Insight for LGBTQ inclusive business practices. In addition to these global and national placements, we were recognized regionally as a blessed place to work in Chicago, Phoenix, Arizona, Australia, the United Kingdom, Italy, and Austria. Insight Canada was also recognized number three of the top 100 solution providers. Additionally, for 2021, Insight was recently recognized as an employer of choice by Fortune, placing number seven in the information technology service industry on the list of Fortune's world's most admired companies. This was the first time receiving this prestigious award for Insight. Now onto slide eight. As we navigated the challenges of 2020, we continued to execute against our strategy to deliver IT solutions to our clients. Our efforts to deploy innovative solutions to the edge were recognized in the Forrester New Wave for Computer Vision Consultancies published in Q4 2020. Insight was named a strong performer by Forrester, highlighting their expertise in building computer vision solutions that fit current hardware constraints and the Internet of Things platform to manage them. With a global team of 1,500 digital innovation engineers, architects, and technical consultants, Insight maintains the expertise to design and manage computer vision models deployed across mobile devices, vehicles, and in settings with limited or no network connectivity. An example of this innovation is our digital innovation team, which helped a manufacturer of commercial generators identify production process issues. As a result, the manufacturer successfully reduced scrap, realized labor savings, and achieved significant ROI. We also leveraged our managed services to help our clients create better workspaces and simplify device management. For example, our connected workforce team helped an insurance company optimize end-user support across 300 locations by implementing a managed service desk and filled with support teams through insight. The client improved cost control, resolution times, which resulted in increased end-user satisfaction. Slide nine. As we transition to 2021, we reinforce in our belief that the IT industry is resilient and the demand for IT solutions will continue to evolve during economic downturns and recoveries. Across the markets where we do business for 2021, industry analysts expect low to mid-single-digit growth across hardware, software, and services sales. In the first quarter, we're seeing hardware bookings in North America improve by mid-single digits year-over-year compared to the first quarter of 2020. This positive data point is supported by elevated backlog coming into 2021. It could lead to above-average seasonal results in the first quarter compared to the fourth quarter of 2020. We're well-positioned to help our clients solve complex IT challenges. We believe that these strategic investments should be in the go-to-market solution areas over the last several years, as well as investments in our solutions and technical talent in 2020, positioned as well to execute our business goals in the new year. As a reminder, our solution areas are First, connected workforce. We help organizations keep their employees connected, productive, and secure with professional and managed services that maximize return on investment and free up internal resources. We help our clients work smarter. Second, cloud and data center transformation. We help businesses modernize and secure critical platforms to transform IT. Through end-to-end services from architecture to management, we help leverage the right platforms to increase agility and support innovation. Third, digital innovation. We help customers navigate their digital transformation journey end-to-end to improve clients' business performance, engage customers, and uncover new revenue streams. We help our clients innovate smarter. Our supply chain optimization competency is the foundation of our solution areas to ensure we're providing our clients with the critical products and services that will help them manage today and transform for the future. On to slide 10. As we move forward into 2021, we remain committed to our long-term priorities, which include continuing to innovate in order to capture market share in high-growth areas such as the cloud and the intelligent edge, developing and delivering solutions that drive better business outcomes for our clients, expanding and scaling our business with strategic clients in ed markets, and lastly, continuing to optimize client experience and our execution through a relentless focus on operational excellence. We believe that by investing in our operating segments, organized around these three long-term priorities, we will deliver our five-year key imperatives for value for our shareholders, clients, partners, and teammates. As a reminder, these goals are go faster than the market at an 8% to 10% CAGR, expand EBIT margin to 5% to 5.5%, optimize return on invested capital to a range of 19% to 21%, and increase services gross profit as a percent of total GP to between 50% and 52%. To support our go-to-market strategy globally, we have a strong operational platform that includes scalable IT systems and processes, robust digital marketing capabilities, and a culture of continuous business process transformation and automation. In 2021, we plan to continue to invest in these critical areas with the goal to deliver a great client experience while also optimizing our infrastructure to scale the future growth. We continue to make meaningful progress as a company as we successfully transformed our business from an IT reseller to a well-respected intelligent technology solution provider with deep expertise across multiple technology areas our clients value most. We have a single united global leadership team integrated in scalable IT systems and operations, a highly engaged workforce, and a clearly defined go-to-market framework around our solution areas. We believe we're well-positioned to compete in the marketplace and win as we head into 2021 and beyond. I'll now hand the call back over to Glynis.

Thank you, Ken. In the recessionary environment of 2020, where clients were focused on controlling discretionary capital investments, particularly for hardware infrastructure products, we focused on selling services and solutions, which helped drive gross margins up 90 basis points year over year. We reduced our operating costs to meet current demand and and accelerated the integration of PCM, and this allowed us to drive adjusted earnings from operations growth of 14% year-over-year. And to complement our strong earnings growth, our business generated record level cash flow from operations. Today, we have the majority of our $1.2 billion debt facility available to fund future growth. While earnings and volumes are down versus our original expectations due to COVID-19, our significantly stronger cash flow performance allowed us to deliver performance ahead of our expectations with adjusted return on invested capital of 13%. This performance demonstrates the resilience of our business model and the cash management discipline we have instilled across the business. Moving on to North America on slide 12, fourth quarter net sales were $1.8 billion, down 1% year to year due to decreases in hardware and services sales. Despite higher bookings going into the fourth quarter last year, We did not realize growth on the top line for hardware due to continued supply and balances across the channel and also plant requirements this shift in 2021. As a result, we exited the year with elevated backlog that we expect will clear in the first half of 2021. Growth profit in North America for the fourth quarter was up 1% year-over-year, driven by a 10% increase in services growth profits. These results include strong year-over-year growth in warranty and cloud solutions, which also drove growth margins up 20 basis points year-over-year. Selling and administrative expenses decreased 5% year-over-year, and adjusted earnings from operations grew 13% year-over-year to $78 million. Moving on to the full year on slide 13, net sales in North America grew 10% year-over-year, The benefit from including a full year of PCM in 2020 was partially offset by the impact of COVID-19 on demand, particularly for hardware, and also supply chain challenges. Growth positive in North America grew 17% year-over-year, much faster than sales, due to a higher mix of cloud and warranty sales, which are recorded net, and the benefit of including PCM in our results for the full year. Growth margin increased 90 basis points to a new annual record of 15.4%. Expense control and synergy acceleration allowed us to grow adjusted earnings from operations 15% year-over-year, marking the fifth consecutive year of double-digit earnings growth in our North America business. Moving on to the neon slide 14, net sales in the fourth quarter declined 5% in constant currency. Gross profit also declined 3% in constant currency. Slower than sales, primarily due to an increase in higher margin services net sales. Adjusted earnings from operations was $11 million, up 1% in constant currency. For the full year of 2020, our EMEA business reported net sales of $1.6 billion, up 1% year-over-year in constant currency. Strong growth in software sales with public sector clients across the region was partially offset by continued migration to cloud solutions. Gross profit grew 3% in constant currency, faster than sales, including a higher mix of cloud and services sales. Adjusted earnings from operations increased 12% year-over-year in constant currency to $46 million. Brexit negotiations wrapped up in December, and the new trade and cooperation agreement between the EU and the UK came into effect on December 31, 2020. Under the new arrangement, The general position is that tariffs and other customs duties and taxes will not be applied to goods shipped between the UK and the EU. We do not believe Brexit has impacted our results materially to date. We believe our EMEA business is healthy and well positioned to serve clients across the UK and mainland Europe with our existing local presence and the supply chain model we've operated under in this region for some time. Moving on to APAC on slide 16, Net sales of $45 million and gross profit of $12 million in the fourth quarter increased 24% and 16% respectively year-over-year in constant currency due to higher sales across all categories in the region. This led to adjusted earnings from operations of $3 million in the quarter. For the full year on slide 17, in constant currency, net sales in iPad business declined 4% compared to 2019. The decline was primarily driven by decreases in hardware and software, partially offset by a 14% year-over-year increase in insight-delivered professional services. The team was disciplined in managing discretionary spend, and as a result, adjusted earnings from operations for the full year was $13 million, up 17% in constant currency. Before I go on to taxes and cash flow, I'd like to provide some color around how our strategy is impacting our business mix and profitability. As Ken noted earlier, our key imperatives to deliver long-term value are growth sales faster than the market, expand EBITDA margin, optimize return on invested capital, and increase services gross profit as a percentage of total gross profit. In 2020, we made meaningful progress towards these goals, reporting top-line growth of 8%, including the full year of ownership of PCM. We also expanded adjusted EBITDA margin by 20 basis points, year-over-year due to stronger gross margins and acceleration of our PCM integration plans. We delivered adjusted ROIC of 13% ahead of our expectations with our strong cash flow generation, more than offsetting the effect of lower earnings than expected due to the recession. And finally, in 2020, our services grew 17% year-over-year, faster than product sales, which drove our services gross profit as a percentage of our consolidated GP of 130 basis points to 48%. As a result, our services growth was a primary driver for gross margin expansion year-over-year to a new annual record of 15.6%. Moving on to our tax rate, our effective tax rate for 2020 was 24.4% compared to 24.7% in 2019. The net decrease in our tax rate was a result of tax benefits made available by the CARES Act in 2020, as well as other offsetting items related to state income, state taxes, and tax credits. Rounding out our cash flow performance on slide 18, our operations generated $366 million of cash in 2020 compared to $128 million in 2019. As we have highlighted previously, our cash cycle is inverted, meaning We repay our partners on shorter terms and we receive payments from our clients. This allows us to drive more cash flow when sales decline sequentially. We experienced this dynamic in 2020, which along with our disciplined cash management practices, has helped drive our cash flow generation of the $356 million for this year, slightly above the top end of the range we provided in our third quarter outlook. We expect cash flow will normalize in 2021 as our business grows and as we see mixed shifts to more hardware, such that for the full year of 2021, we expect cash flow from operations will be between $200 to $250 million. In the fourth quarter, our cash conversion cycle was 30 days, down eight days year-over-year. The decrease in our cash conversion cycle year-over-year benefited from the following items. Expanded use of our infrastructure financing facilities, including the effective recently negotiated expanded payment tournaments tight discipline around investments in our inventory, and improved aging performance of our accounts receivables as we deployed insights collection practices to the TCM business. During 2020, we sold two buildings, one in the fourth quarter for net proceeds of $14 million and another in the fourth quarter for net proceeds of $26 million. We had four of our buildings head sale at December 31, 2020, and closed on the sale of all of these facilities in January 2021 for net proceeds of $27 million. Total net proceeds from the sale of all of these buildings was $67 million. CapEx for the full year was $24 million, primarily spent on technology investments. We invested $6 million to acquire a digital consulting company in France in February of 2020. And lastly, we used $25 million to purchase shares of our common stock in the first quarter of 2020. At the end of the year, we had a cash balance of $128 million, of which $112 million was resident and reformed subsidiaries, and this compares to a cash balance at the end of 2019 of $115 million. We had $349 million of debt outstanding at the end of the year, down from a total debt of about $859 million in 2019, and we have substantially paid down the debt incurred to acquire PCM significantly ahead of schedule. On slide 19, we're exiting the year with a leveraged position at just over one times debt to cash flow or EBITDA, which is well within our level of comfort. Under our ABL agreement, our primary compliance covenant is a fixed charge coverage ratio, which includes 12-month trillion EBITDA coverage over capital expenditures, taxes, and cash interest. As of December 31st, we're at just under five times against the minimum requirement of one times. and we are confident we can support our capital requirements and liquidity needs. Moving on to slide 20, as a reminder, we took actions in 2020 to help preserve our profitability during the pandemic while positioning our business to emerge healthy and competitive as market conditions improve. Specifically, we reduced discretionary spending across business and certain variable expenses and were not incurred in 2020 due to COVID-related impacts on our financial results, such as sales reps commissions, bonus, and, of course, travel. We right-sized our operational delivery platforms to align with volume trends in 2020. As we work to grow faster than the market in 2021, we will continue to realign the needs of these organizations. We accelerated our existing PCM integration plans around back office, sales, and service, which positioned us to exit the year with run rate savings of $70 million one year ahead of our stated timelines. As market conditions improve in 2021, we expect to see increases in these discretionary and variable expenses come back into the business. In addition, we continue to invest in our sales and technical resources in 2021 to support business growth. As a result, we currently expect SG&A, excluding amortization expense, will be approximately 11.7% of net sales in 2021. Our balance sheet is healthy. We have access to capital sufficient to support our growth as the IT market recovers. We believe the steps we took in 2020 will help us emerge in a good position to compete in 2021. I will now turn the call back to Ken to review our 2021 outlook. Ken?

Thank you, Glynis. We're pleased with our team's resilience in 2020 and believe our business is poised to recover strongly across each of the markets in which we compete. With respect to our 2021 outlook, we expect to deliver net sales growth between 4% and 8%, We also expect adjusted diluted earnings per share for the full year of 2021 to be between $6.60 and $6.80. This outlook assumes interest expense between $25 and $28 million, an effective tax rate of 25 to 26% for the full year of 2021, capital expenditures of $75 to $85 million, including approximately $60 million for the build-out of our new corporate headquarters, and an average share count for the full year of approximately 36 million shares. This outlook excludes acquisition-related intangibles amortization expense for approximately $32 million and non-cash convertible debt discount issuance costs reported as part of interest expense for approximately $12 million and assumes no acquisition-related or severance in restructuring expenses. To assist with your modeling, we have posted a schedule on our website on the investor relations page that shows the expected amortization expense and non-cash convertible debt discount and issuance costs by quarter for 2021. Thank you again for joining us today. I want to once again thank our teammates across the world for everything they do for insight, including resiliency of our culture displayed this past year by the daily actions. I'm honored to be part of such an incredible team. That concludes my comments. We'll now open up your line for your questions.

As a reminder, if you would like to ask a question, you may do so by pressing star, then the number one on your telephone keypad. Again, that is star one if you would like to ask a question. Your first question is from Matt Sheeran of CECL.

Yes, thank you, and good morning, everyone. My first question, Ken, is regarding your commentary about hardware and about some lift in backlog and bookings there. When you talk about hardware, are we talking about continued strength in client devices, or are you also seeing an increase in bookings for infrastructure and on-prem projects? And just as part of that question, could you talk about any seasonal trends? It sounds like you've got backlog going into Q1, so should we assume that it could be better than seasonal to start the year?

Yeah, good question, Matt. Thanks for the – as far as the hardware, we are seeing that across certainly devices as well as infrastructure, you know, storage, servers, networking as well. So I'd say it's pretty balanced as far as the booking increases that we're seeing. And as we did mention, of course, we did come into the quarter with elevated backlog, much due to, of course, shortages that were existing and that couldn't be fully supported at the end of Q4. So that certainly is leading to some uplift, although there are some still continued constraints in the market from a supply chain point of view that we're navigating through Q1 as well. Okay.

Just one second, Matt. So we do expect that Q1 seasonally. will be stronger than Q4. We're not saying that Q1 is going to be stronger than Q1 of last year, just to be clear. More like flat.

You mean in terms of year-on-year growth? Okay, very helpful. Okay, great. And then just on the infrastructure side, some of your competitors and distributors are talking about still really not seeing a lot of visibility in terms of companies coming back and doing the bigger projects because of shutdowns and that sort of thing. Are you getting any visibility that that should improve through the years, or is it still early to tell?

It's still early to tell, but we are, you know, we are certainly believers that it will recover towards the second half of the year for sure. And what drives that, of course, when we look at, you know, these cycles that occur in our business is that, you know, you can't put these projects off forever. And what has become clear through the pandemic is that all companies are becoming digital. There isn't any company that we talk to that isn't talking about becoming more digital. And in order to become more digital, it's not just a software solution. You've also got to make sure that you modernize your infrastructure and whether that be on premise or in the cloud environment. So that's where we see a lot of these projects coming to the forefront. As many clients, of course, last year, first focus was completely addressing how do we support from a collaboration point of view or people working from anywhere. That's still going on, but that's certainly much more mature than it was a year ago. So I think now that companies are starting to look at their environments and understand how they're going to compete effectively going forward, And then, again, at the top of the list is how do we become more digital.

Okay. Thank you. And just my last question regarding the model. You gave us your – the S&A percent for the year at 11.7. So it looks like – backing into gross margin, it looks like gross margin could be up again this year. And that would be a little surprising given that the mix could skew a little bit more toward hardware. Or are you continuing to see strong growth in services?

Matt, we would anticipate that the gross margin is going to be flat year-over-year, specifically to your point about seeing the higher hardware growth in 2021 than we saw in 2020.

So flat year-on-year. Okay. All right. Thank you.

Your next question is from Adam Tindall of Raymond James.

Okay. Thanks. Good morning.

I just wanted to start on the 2021 guidance of the 4% to 8% year-over-year growth. What are the assumptions embedded in this for devices in particular? You're lapping a very strong year for the category.

I'm just wondering if you think they can still grow embedded in that 4% to 8% assumption. And if possible, could you quantify that backlog and maybe how much it contributes to that to give us some confidence in those numbers? Yeah, Adam. So overall, you know, as far as the forecast for the 4% to 8% growth. So how we look at it basically is that I think in general most economists are viewing that, you know, the GDP growth will be anywhere from 3% to 4%, again, depending on what region you're talking about, but in that range. What we typically see, of course, in these cycles is that IT will grow 2% to 3% faster than the GDP growth. So that's how we, you know, have come to the conclusions of the growth that we should certainly start to see. In regards to devices, certainly, you know, when you look at our makeup of our business, you know, 60% of it being hardware, you know, the rest being software and services. So in the hardware category of that 60%, devices are certainly the largest segment. It's not the only segment, of course. There's a lot of infrastructure spent in that. But specifically on the device front, I do believe there's growth in devices coming, and all the sort of OEM partners that we talk to, I think they feel the same way. There are certainly a lot of constraints you're hearing about in the marketplace. And I think what's driving that, of course, is that, as you saw, the notebook category increased pretty significantly last year as its company went away from sort of the balance of 55% being desktop, 45% being notebook. Now you're seeing 80% plus being notebooks. Notebooks, of course, come with a significantly higher ASP, and they also have a significantly higher refresh rate. So I think what we're also seeing is that, as we talk to our OEM partners, is that many clients, of course, are looking at saying where they might have, you know, sweated a notebook asset maybe four years, they're starting to improve that and shorten that cycle, especially as a little bit more wear and tear on these devices than there was before. So that sort of gives us the, you know, The reason for optimism around certainly devices. The other thing that you'll always see is the fact that the channel has always seemed to do better in devices than the overall market does. That's always proven out. So we certainly track that data. So we do believe that there will be growth in devices. It won't be as substantial as it was last year, but it will be a contributor to that growth model.

Okay, and any way to maybe help us with the backlog, how much that represents, so the 4% to 8% or how much it is in dollars?

Yeah, we wouldn't get to be that granular on that, Adam, but certainly, as I said, it is certainly a contributor, and we are seeing positive indications of that. And as you know, there's tremendous backlog in areas like Chrome and so forth that are going to probably be constrained through second quarter. Understood.

And just a clarification, Ken, I think as you were talking about Q1, you were saying in your prepared remarks, I believe, seeing above seasonal, and I thought I heard you say up mid-single digits in terms of Q1. But then in response to Matt's question, I think Gwyneth talked about Q1 being flat year over year.

So maybe just help me with, did you say up mid-single digits in your prepared remarks, or did I catch that incorrectly? No, you got it right, but what I said is in bookings. is what I indicated in Q1. We were seeing, you know, booking rates year over year at this juncture in the quarter improve, you know, in that mid-single-digit range. And that would translate to be, you know, seasonal improvement from Q4 and flattish to last year's Q1, which, of course, as you know, is a pretty strong quarter with COVID coming on the scene. Yeah, yeah. Makes sense. That's helpful.

And that's one for me. Cash flow has been a continued bright spot. Your total leverage is now getting to around one time. The balance sheet's healthy. I think you talked about $200 million more of operating cash flow coming. With that as a backdrop, maybe just revisit the capital allocation priorities. Does it make sense for another PCM-sized acquisition at this point?

Yeah, you know, we'll certainly always continue to look on the M&A front. You know, Adam, that's been a key part of our strategy, so we'll continue to do that at this stage. But certainly, you know, continuing to, you know, to focus on, you know, the debt pay down, continue to focus on investing organically in the business, which we're doing now. We started to do in the back half of last year to invest in sales, client-facing resources from both a sales point of view and technical point of view. So that's certainly been a priority for us. And you're seeing that a little bit in the SG&A increase as well. And then, of course, we'll look at always returning, you know, dollars back to shareholders. So those continue to be our priorities. Very helpful. Thanks, Ken.

Your next question is from Paul Koster of JPMorgan.

Hi, thanks. This is Paul Chung on for Koster. Thanks for taking my question. So, you know, great performance on free cash this year. When you say kind of normalization, assume some improvement in DSOs, maybe your payables come down a bit this year. And then as we think about the seasonality of cash flow, should we expect that very large kind of cash inflow in 2Q and then usage in the second half, kind of like 2020?

Yes. We wouldn't anticipate a change in the seasonality around the cash flow because that's driven by the business. and the seasonal demands on the business. So that would be a good assumption, Paul.

Okay. And then just on the guidance, you know, the sales outlook spread is, you know, a little bit larger than usual. So I assume you're kind of baking in some COVID uncertainty, but, you know, what are some of the indicators you need to see to hit the top end of that range? And then does guidance kind of assume the second half acceleration as the vaccine gets more, you know, widely distributed?

Yeah, I think you've got it right there, Paul, in regards to the second half. Certainly, I think everybody's indicating that will be stronger due to the fact that, you know, the vaccine is gaining momentum, certainly across the U.S. and other countries. So that looks pretty optimistic. There are certainly still, you know, vaccine variants out there that are, you know, in question and concerning. So that might sort of mute the lower end of what our growth guidelines are. But when you look at what occurred back in, you know, 2009 during the last sort of big decline that we saw in the economy and in IT, the rebound was substantial in 2010. It rebounded in the high teams sort of run rate. So if we get anything like that, I think the 8%, I think, is very, very doable. So that's sort of how we came up with the modeling. So I think you're correct in this sort of why there's a wider range.

Okay. And then just lastly, just to follow up on the free cash flow, I mean, So your guidance, your sales is up. Your margins are kind of expected to be flat. You know, spending's flat. So why wouldn't your free cash flow be up this year? I know you have some capex spend on the HQ, but if you adjust for that, why couldn't it be slightly up? I know you expect some normalization, but what was kind of driving some of that? If you could help us.

So partly it's because of the return to growth. Ultimately, as we grow, because we have that inverted cash flow cycle, as we start to grow, we end up using more cash as we go into that growth cycle. So that's what's the primary driver. And as you saw in Q4, we had no debt under our ABL at the end of Q3. And going into Q4, we had $140 million of debt outstanding under our ABL. So that's also a use of cash that – But that was also driving growth and some of the backlog that you're saying that will flow through the business going into 2020, going into the first half of 2021.

Okay, that's helpful. Thank you very much.

Your next question is from Anthony Levitzinski of Sudodianco LLC.

Yes, good morning. Thank you for taking the question. So as far as the supply chain, the constraints that you referenced, are those primarily for Chromebooks or are you seeing any other constraints?

Yeah, no, I think, Anthony, we're seeing more than just Chromebooks. Certainly Glass is probably the biggest overall shortage, and, of course, that would affect, you know, notebooks, displays of sorts, and certainly Chromebook buying has increased pretty significantly. So there's, you know, it's not helping the cost because it's using so much of that. But we're also seeing other areas that are, you know, concerning. Processors have been sort of, you know, tipsy-turvy here for the last almost 18 months. It hasn't been real consistent supply, so that continues to be a little bit of a concern. I think that gets alleviated more in the future times. Apple, of course, is committed to using their own silicon. You've seen Microsoft announce they're going to use their own silicon in their Surface devices, and Samsung has announced they're going to use their own silicon. So I think that does certainly alleviate, but that's a longer-term sort of recovery than what we're seeing here for the next quarter or two. There's also signs of some memory shortages that are occurring as well. And, of course, that goes more into more of that, of course, is used. You're seeing automotive complain about the fact they can't get enough devices themselves. So it goes across the full supply chain, and certainly infrastructure products are also impacted by that. It's not reason for alarm at this stage, but certainly lead times are stretching, and there's a lot of focus on improving lead times at this stage. But it definitely is not flowing like it would normally flow.

Got it. Okay. Thanks for that, Ken. Definitely appreciate that. And then as far as just looking at the guidance for the year, so you're expecting the back half to be better than the first half. And as far as Just wondering, now that you have PCM fully integrated, you've had it for a while, but if you could just talk a little bit as far as growth that you've seen from existing customers versus your ability to win new customers now that you've had PCM under your belt.

Yeah, Anthony, really good question. And I think one of the other reasons, of course, we are optimistic on growth for 2021 is the fact that last year was a heavy year for integrating PCM, especially during the COVID environment where we were doing much of this remotely. So you can imagine the numbers of people internally operating to white glove clients over to our new systems and platforms and you know, um, web interface and EDI transactions. So a lot of very internally focused, but you'd expect when you do an acquisition to that size, um, that's certainly all well behind us now as we enter 2021. So, so we believe that, um, certainly a lot of those clients that's now the PCM teammates fully understand all of our reporting, all of our systems, all of our tools. So they're operating certainly a much higher degree of efficiency. than they certainly operated last year at this time as an example. So that certainly gives us also optimism for growth and acceleration of the business.

Got it. All right. Thank you, and best of luck. Thank you.

As a reminder, if you would like to ask a question, please press star 1. Your next question is from Mark Weisenberger of B. Reilly Securities.

Thank you. Good morning. I'm wondering if you could talk about wallet share gains across your customer cohorts, and where were you able to successfully increase scale or scope with these customer cohorts, and maybe if you could quantify some of those gains?

Yeah, I mean, certainly when you looked at where we certainly gained, certainly the software business was considered to be strong for us. We saw cloud again. We talked public cloud revenues and GP being, you know, now GP being 20% of our total GP. So that continues to grow. And certainly the data sets we have that we are gaining share in those areas. From a business point of view, what we saw in fourth quarter, you know, specifically was that, you know, our public sector business, you know, was up nicely, you know, in the 15% range for a Q4 year over year. And that represents, in the quarter, about 13% of our total revenues came from public sector. So good growth, but we know there's a lot more opportunity in the public sector space, and we're continuing to invest very heavily in that area to continue to grow that. And then what we saw really pretty much from our enterprise client set and our commercial client sets, the remaining parts of our business, in the quarter they were down 2%, you know, from a comparison point of view. That's where we sort of saw how the market sort of played out, which again was a significant improvement from what we saw in Q2 and Q3 in those categories.

Great. Thank you. And maybe if you could talk about the priorities within the respective cohorts kind of in the fourth quarter. and how you expect that to kind of evolve through 2021, and would any of those kind of changing priorities impact the typical seasonality that we might see in the business and the impacts on the P&L?

Yeah, I don't think so. I think when you talk about the priorities, are you talking about it more from a client perspective? Correct. Yeah, so what we see in general across the board for clients, of course, it's continued focus on how do they – continually improve their ability to collaborate and work from anywhere. So that continues to certainly be a top priority in a very secure way. So security is the top of every client's list, as you well know. So none of them are going to take any chances there. And, of course, as we've become more remote and virtual, we've exposed ourselves more from a security front. So security, of course, is getting lots of attention and driving certainly a lot of substantial dollars. The other, as I mentioned earlier, of course, is all clients are becoming more digital. So youth priorities in there and how they become more digital, how they become more e-commerce oriented. So that's where our digital innovation area is helping our clients pretty significantly. And then, of course, that dovetails very nicely because, again, as I mentioned, you've got to modernize the infrastructure, whether it be private or public cloud. So those two cohorts work closely together, improving certainly our client experience. So Those are the key drivers, again, everything being digital, driven by AI and so forth, as well as the work from home, collaboration, and security are certainly big key areas that, of course, all of our clients are focused on and certainly we're focused on.

Great. And one final one for me. With 5G and private networks starting to gain traction, I'm wondering how involved is Insight with IoT and industrial IoT? And I know it's still very early, but kind of any medium-term aspirations on how that could evolve as a percent of the total business? Thank you.

Yeah, good question. It's one area, you know, Mark, that we're certainly very engaged on. We believe very strongly in the intelligent edge. As we said, there's three clouds. There's the private cloud, which we know and love, the public cloud, which we know is driven by a few key players, and the largest cloud that will evolve is the intelligent edge as everything comes down to moving from data centers to centers of data. So as things become more and more IoT-enabled through AI, that will drive the intelligent edge in a big way. I do believe that COVID probably has set that back a little bit from our prioritization of a lot of our clients, but we saw that accelerating in 2019. A little bit muted, of course, in 2020, but we do expect that to start to continue to recover. So we believe we're very well positioned for that, you know, emergence of IoT. And that's where our digital innovation team is very, very active in supporting clients, you know, at the edge. And again, that's where our connected workforce also comes through to really help do that through a managed services. So we are seeing certainly some good bright spots in that area, but we believe that's a future growth area for us as a company. Great. Thank you very much.

Our final question is from Vincent Colicchio of Barrington Research.

Yeah, Ken, most of mine were answered. Just the supply constraint issue, did that improve at all sequentially, or is it sort of, you know, status quo?

Yeah, Vince, what we're seeing is it's probably pretty much status quo. We had sort of at all anticipated and hoped that it would improve in Q4, and it got a little bit stretched there. And I think, you know, the demand environment is improving to a degree. Certainly we can see that through our booking rates. So I think that's putting more constraints on that. So I think it's going to be a little bit, you know, touch and go on supply constraints, certainly, you know, through this quarter and into second quarter. Again, not catastrophic type of situations where we're seeing, you know, huge sort of ASP increases driving all this as well, but certainly something that we're monitoring, you know, on a daily basis.

And then last one, just to be clear, are you complete with the cost savings of the PCM?

Yes. Yes, we are.

Okay. Thank you. Thanks, Carter.

Thank you. Thank you.

Thank you.

There are no other questions in queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.